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Lending Takes Another Teeth-Kick

The odd-sounding measure ("You've caused a financial catastrophe. That'll be $8.50 please.") is the Obama government's latest plan to recoup the cost of bailing out the financial system over the last 18 months.

The plan basically taxes large American banks. Based on how aggressive they are.

The FCRF will require large financial institutions (those with more than $50 billion in consolidated assets) to pay fees equal to 0.15% of their "covered liabilities" each year. Covered liabilities defined as the total value of the bank's assets minus Tier 1 capital (cash on hand) and bank deposits (cash stashed at the bank by customers).

This formula has a few implications. It rewards banks (via lower fees) for holding on to cash and encouraging customers to make more deposits. The structure charges higher fees to banks with large asset bases.

For most banks, the most important and numerous assets are loans. Money lent to consumers and businesses, providing interest income.

Under the new fee (slated to come into effect June 30), large banks will get penalized for lending. More loans = more assets = higher fees.

Going forward, when loan officers review an application they will have to build an extra 0.15% into their expenses for lending the money. Making loans less profitable and more risky. More borrowers will be turned down as a result.

The measure comes at a tough time. The American banking system is already going through its steepest lending decline in 35 years. As reported by the Federal Reserve, outstanding loans at U.S. commercial banks have fallen by $600 billion since October 2008.

In fact, due to statistical anomalies I've discussed in the past, the actual decline is even larger. It's likely that outstanding loans in America have fallen by a staggering $1.2 trillion.

That's a lot less money circulating in the economy. And a major headwind to economic recovery and financial growth.

The new crisis fee is one more hurdle the banking system will have to jump if lending is to be restarted. This in addition to high unemployment, low interest rates, and the fear of more losses on mortgage-backed securities.

The fee legislation is particularly interesting because the Obama administration was recently berating bankers for not lending more. The government is pushing banks to issue more real estate loans as part of the Making Home Affordable program.

Administrators have even set up an elaborate system that penalizes banks if they don't meet loan targets (or have a really, really good explanation about why they fell short).

But the government can't have things both ways. If you tax banks for lending, they will lend less. No matter how much you bully them.

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